Wednesday, March 27, 2013

This is the third and last tranche of evidence I submitted to the Commission on Banking Culture and which their Government Servants sought to suppress.

Regulation by prosecution

47.The recent report issued by the Treasury
Select Committee entitled '... Fixing LIBOR: some preliminary findings...'
contains very little that those of us
who have long been concerned about the criminal state of the British banking
sector did not already know.

48.One of the key findings of the report deals
with the relationship between the various regulatory agencies of the State, and
the way in which they dealt with the emergence of incriminating details about
the LIBOR affair.

49.What this report demonstrates so clearly is
the lack of willingness for the FSA to adopt its powers to prosecute financial
crime, and the very narrow interpretation they placed upon their function. This
reflects earlier findings concerning the attitude of the regulator towards its prosecutorial
role uncovered in its earlier days.

51.'...The Committee is concerned that the FSA
was two years behind the US
regulatory authorities in initiating its formal LIBOR investigations and that
this delay has contributed to the perceived weakness of London in regulating
financial markets...'

52.This failure to respond effectively to the
early information about Barclays is reflected upon critically by the Committee,
as it identifies the likelihood
that this evidence may have led to evidence of other wrongdoing elsewhere in
the wider market.

53.'...Barclays may well not be alone. Nor is
it likely to be a London-based phenomenon. The FSA is continuing to investigate
the conduct of seven other banks in relation to LIBOR— some of them non-UK
based banks. The FSA’s regulatory counterparts in several other countries are
also conducting their own investigations. Barclays is just one of many international
banks under investigation for possible market manipulation. It is important
that Barclays’ serious shortcomings should not be seen in isolation from the
possible actions of other banks and
we await the results of ongoing investigations...'

54.This is a classic scenario which identifies
the sheer 'shamateurism' of most British regulatory actions. It is manifested
by the failure to be able to read the signs of crime and appreciate the fuller
ramifications of their implications.
Thus it is that the regulators tend to focus on simply that evidence which is
immediately in front of them, and without seeking to extrapolate from the
initial facts what else might be happening in the wider market context.

55.The Committee do not lay the blame entirely
on the shoulders of the FSA, they also contribute serious criticism on the
actions of Barclays and their Compliance function.

56.'...It is important to state that Barclays’
internal compliance department was told three times about concerns over LIBOR
fixing during the period under consideration and it appears that these warnings
were not passed to senior management within the bank. Statements that
everything possible was done after the information came to light must be
considered against a background of serious failures
of the compliance function within the bank. In other words, the senior
management should have known earlier and acted earlier...'

57.This is a damning indictment of the
compliance function within Barclays, but it comes as no surprise to anyone who
has any experience of this particular criminal enterprise. Compliance Officers
were not encouraged to develop pro-active
lines of disclosure, nor were they encouraged to think out of the box. They
were largely an army of box tickers, but it is even more concerning to note
that there did not appear to be any form of channel of communication to escalate
these concerns.

58. Every compliance and money laundering 'best
practice' manual will talk glibly of the need for a direct channel of
communication between the head
of compliance and the Chief Executive. They talk of the need for unfettered
communication in a discreet and secure manner. How was it therefore that the
news of these criminal manipulations were not brought to Bob Diamond's
attention at the earliest possible opportunity. What was standing in the way of the desired state of direct
communication?

59.Clearly, there was a culture inside Barclays
of 'No bad news please', or 'No surprises'. The compliance department clearly
knew what every compliance officer who stays in post for more than a few months
knows, they knew what
questions to ask and what questions not to ask, and when to go deaf, dumb and
blind!

60.A major part of the report deals with the
FSA's failings to take strong executive action when financial criminality is
discovered. It is as if the FSA has taken a deliberately blinkered view of
their powers and has refused to look beyond and outside their most immediate
remit. This is very disappointing because it has been hoped that the FSA would
begin to take a more robust
approach towards its powers to prosecute financial
crime, after the introduction of the FSMA in 2000.

61.Financial practitioners do not fear
regulatory fines, mostly because they are not individually called upon to pay
them. The burden always falls on the shoulders of the shareholders, many of
whom, if the Standard Chartered Bank case is anything to go by, will not even
blame the Executives of the bank for landing them in this mess in the first
place. Regulatory findings will always find fellow practitioners who are willing
to sympathise with them. Public scandal can be difficult to handle, but rarely
does an executive get forced from office. He may quietly resign at a later
stage, but he does so with a well-padded pension fund and other benefits to
cushion his existence.

62.This whole issue of the suitability of
punishment for serious wrong-doing has been a critical element of the
longer-term failures of the FSA to bring a robust approach to the regulation of
the UK financial market. Ultimately,
it is prosecution for crime which the financial practitioner truly fears, but
if the market knows that the regulator is deliberately avoiding adopting its
prosecutorial role, then this will lead to a realisation that the regulator has
no real teeth!

63.It has always been one of the greatest
ironies of the whole regulatory conundrum that criminalisation for simple
offences of ordinary 'crime' is one of the greatest fears of the Executives of
the financial sector.

64.Ironically, it is not necessarily the
sentence which is passed which is of the
most importance, the true fear of the financial practitioner is of the verdict of 'guilty' being publicly
pronounced in open court. Such a verdict immediately takes away the sense of
being a 'protected species' which too many banksters have believed they
possessed for too long.

65.A criminal conviction places them on a par
with other ordinary criminals, people who under any other circumstances they
would go out of their way to avoid like the plague. The fact of conviction now
puts them in the same 'criminal class' category and it spells social and commercial
death for any city practitioner who has been so convicted. It is the ultimate exclusionary weapon of
social and reputational mass destruction.

66.So powerful is the impact of criminalisation
that even those who had once called the convicted man a friend find it very
difficult to continue to see him, even in a private social context. As for any
further dealings with him on a
commercial context, such a thought would never enter their heads. He is now
entirely beyond the pale, and he can never be received again inside the magic
circle.

67.This may be what makes it so difficult for
regulators to bring such a powerful weapon to bear on those whom they perceive may
come from the same class and socio-economic background as themselves! They won't
admit this of course, and they tend instead to use the excuse that financial crime cases are too difficult to
get convicted, that juries do not understand them, although that has never been
my experience.

68.This was one of the major problems about the
predecessor of the FSA, the Securities and Investments Board, who absolutely
refused to contemplate prosecuting any financial practitioner for crime.

69.In 1999, I was invited to conduct a review
of financial services regulation for the UK Treasury. Among other people I
interviewed was a senior staffer from the SIB who would be moving into the new
FSA. I asked him about the powers to prosecute possessed by the new regulatory
agency.

70.'... the official concerned was more
forthcoming. He agreed that the FSA would become responsible for a far greater
degree of responsibility for prosecution in a number of areas, including money
laundering issues, but felt that this predicated the need for a further
regulatory interface. He said;

71.“…There is an anxiety about the new criminal
functions which we are being tasked to accept…various elements such as insider
dealing, market manipulation, etc,
all tend to colour our internal philosophy towards the question of conducting
prosecutions…you really should understand,
because of the difficulties associated with obtaining convictions in the
criminal courts, there is no unswerving acceptance of the need for wholesale
prosecution powers…”

72.This answer was given in such an open way,
in contrast to so many other answers which he gave, that he was invited to
state why he was so sure that this
was the case. His answer was studiously revealing, and must be considered to
contain a huge degree of truth. He said;

73.“…Because, frankly, Howard Davies has no
intention of ending up with the sort of reputation which so bedevilled the SFO
in its early days. He refuses to be
tarred with the same brush as Barbara Mills or George Staple…”

74.The Treasury Select Committee has clearly
identified that this mentality still exists within the regulatory environment.
They state;

75.'...The FSA apparently believes that its
fees are not raised for the purpose of prosecuting offences other than those
set out in FSMA. The Committee is concerned
by this. The FSA has responsibility for regulating the key participants in
financial markets. The FSA’s decision whether to initiate a criminal
prosecution should not be influenced by the fact that its income is derived
from firms which it regulates. The FSA has an obligation under section 2(1)(b)
of FSMA to discharge its functions in the way in which it considers most
appropriate for the purpose of meeting its regulatory objectives.

76.Under section 2(2)(d) the reduction of
financial crime is one of these objectives. Financial crime is defined in
section 6(3) as including not only misconduct in relation to a financial market
but also any criminal offence of fraud or dishonesty. The FSA took a narrow
view of its power to initiate criminal proceedings for fraudulent conduct in
this case. The Committee recommends that the Government, following the Wheatley
review, should consider clarifying the scope of the FSA’s, and its successors’,
power to initiate criminal proceedings where there is serious fraudulent
conduct in the context of the financial markets.

77.That this state of affairs still exists
after all these years is a matter of deep concern and the Committee rightly
urges direct reforms of this state of affairs.

78.'...The Committee urges the Wheatley review
to consider the case for amending the present law by widening the meaning of
market abuse to include the manipulation, or attempted manipulation, of the
LIBOR rate and other survey rates. They should also consider the case for widening
the definition of the criminal offence in section 397 of FSMA to include a
course of conduct which involves the intention or reckless manipulation of
LIBOR and other survey rates...'

79.Again, the Committee saw fit to criticise
the length of time taken by the SFO to open an investigation and demands that a
new relationship be forged between the two agencies. There is no reason why
that FSA and the SFO could not and should not operate in tandem when conducting
investigations, so that if, as it seems, the FSA is unhappy to mount
prosecutions, then the SFO can adopt this mantle.

80.'...The Serious Fraud Office (SFO) is now
conducting a criminal investigation
into LIBOR. The Committee was surprised that neither the FSA nor the SFO saw
fit to initiate a criminal investigation until after the FSA had imposed a financial penalty on Barclays.

81.The evidence in this case suggests that a
formal and comprehensive framework needs to be put in place by the two
authorities to ensure effective relations in the investigation of serious fraud
in financial markets. The lead authority must be clearly identified for the purposes
of an investigation, and formal minutes of meetings between the authorities
must be maintained. We recommend that the Wheatley review examine whether there
is a legislative gap between the responsibility of the FSA and the SFO to
initiate a criminal investigation in a case of serious fraud committed in relation
to the financial markets...'

82.Quite rightly, the Committee's report makes
reference to the issue of public anger against that banks in the UK. They are
right so to do. The British public is sick and tired of watching their
financial affairs being raped and pillaged by the criminal banking sector. They
have lost any sense of trust in the banking sector, trust which is vital for
the effective running of the market. A report today by Currencies.co.uk
discloses that 62% of British citizens have lost trust in the banks. The
Committee knows that this state of affairs is very dangerous for uk plc, and
they call for some focused thinking on behalf of the banking sector.

83.'...The findings have focussed pre-existing
public anger with banks. Barclays is one of many instititutions that have
contributed to the state of banking’s reputation. LIBOR has followed the vast
public bailouts of banks during the
financial crisis, the liquidity support and guarantees given to all banks and the apparent lack of penalties
for those who contributed to that crisis, most of whom retained very high
levels of remuneration even after 2008. More recently there has been the scandal
of payment protection insurance (PPI) mis-selling, criticism of banks’
perceived reluctance to lend, complaints about the sale of unsuitable and
complex interest rate swap products to businesses (which are under
investigation by the FSA), and serious IT failures at RBS Group. The economy
needs well functioning banks. They will have a crucial role in any economic
recovery through their lending to businesses and households. An end to crude
‘banker bashing’ would be highly
desirable, but bankers must recognise that they have brought much of this upon
themselves through actions which have seriously damaged public
confidence. While banks continue to provide evidence that wrongdoing
persists the popular mood is likely to remain hostile...'

84.For myself, I believe that the issue has
gone too far, and the genie is out of the bottle. The only way these organised
criminal enterprises can be dismantled is for a root and branch reform of the
banking sector, breaking up the big conglomerates, jailing a lot of 'too big to
jail' bankers, and reintroducing an environment where banks become the servants
of the community and the economy, and not high-rollers in the most unregulated
casino on the planet.

85.So, this Commission is an excellent
opportunity for Government to take a close look at the way in which the
financial sector is policed, because unless something drastic is done to change
the way in which the financial sector
is regulated, then we shall continue to suffer from the kind of scandals that
have made London a cess-pit, the venue of first resort for every con-man, scam-artist
and bankster in the world, rapidly ensuring our descent into the ranks of the
global pariah states.

Tuesday, March 26, 2013

This is the second
tranche of the evidence I sent in to the Parliamentary Commission on Banking
which they sought to suppress.

Identifying the
reluctant regulator.

17. It has started
to become clear that those persons who are employed in the compliance function
in the industry itself do not wish to be perceived to be effective in
'policing' terms or are not encouraged by their employers to become so.

18. The problems
which have always caused financial regulators the greatest degree of difficulty
are those which stemmed from behaviour which
was manifestly 'criminal', whether obvious or submerged. The first kind of
criminal activity can be determined by those acts involving insider dealing,
money laundering, the theft of client's funds or the obtaining of money from investors by deception. The second
group includes behavior which
becomes criminal as a result of its commission (the trader who executes false
trades or makes up positions in order to cover up his own ineptitude, or to
give the impression he has achieved certain targets.) In so doing he commits
offences of Fraud, and stands to be prosecuted in exactly the same way as a
person who makes a false claim
for State Benefit.

19.Unhappily, those
given the greatest degree of responsibility for ensuring compliance with the
rules and regulations , and who have the role of investigating and identifying
any criminogenic behaviour, have, in the vast majority of cases, no previous
experience of investigating criminal offences and appear to possess no obvious
skills or ability to perform an effective policing function, and more
importantly, no desire so to do, nor are they apparently willing to adopt
'policing' techniques or methods.

20.This
unwillingness to be observed to be performing a policing function has begun to impact very heavily on
the effectiveness of the regulatory role,
to the extent that it has begun to become counter-productive. A detailed
re-evaluation of attitudes and responses has defined an alternative interpretation which could be placed upon the
reasons which apparently lie behind the bland, constantly-rehearsed assertions
that other, non-policing techniques could be adopted more usefully to regulate
the financial sector. A hidden agenda begins to be glimpsed, one which
positively discriminates against the adoption of any methods or skills which, while they might have
proved to be effective against the activities of working-class criminals in the
past, are positively discouraged when it came to dealing with the crimes of the
powerful.

21.As a result,
business conduct which, by any definition, and in any other social sector,
would be deemed to be manifestly criminal, has been allowed to proliferate.
Perhaps the most egregious example of such conduct occurred in the observance
of the criminal activities of private pension salesmen, during a time when
Government permitted the practice of allowing private pension companies to
solicit pension transfers and contributions from the holders of occupational
company pension schemes. The activities of the salesmen were nothing short of downright
fraud but their egregious conductwas
allowed to be dealt with within the financial sector in other, non-criminal
ways, because it had become defined in other terms; i.e. the offences of
'obtaining property by deception' or 'false accounting' had been re-determined
as 'mis-selling'.

22.What
distinguishes this conduct from other forms of high-pressure selling, the
criminality inherent in the activity being undertaken, was the deliberately false and deceptive way in which
the contracts were solicited, and the methods which turned the 'Great Pensions
Swindle' into one of the biggest frauds in British history. Vital information
about the performance of their existing pension arrangements, which clients were
entitled to be given, was deliberately witheld from them. Important information
about the way in which the costs of the new private pension would be calculated
and the amount of contribution needed, was carefully avoided. Client financial
fact-finds, the information on which the salesman was supposed to determine the
most suitable financial needs of the client, and which were required by financial
services regulation, were either completed in the scantest detail, or were never completed at all.

23.Looked at on the
simplest basis, the existing clients had to be deceived in order to have agreed
to sign their capital transfer forms over to the insurance companies. They
could not have been truthfully told the facts of the contract they were
entering into, when they signed the agreements
to transfer their accumulated savings to the relevant product providers; nor
could they have clearly understood the facts they were told. Any contract based
upon any of these misunderstandings or misconceptions would be void, and the
product providers, or their agents, would have been guilty of acts of criminal
deception, false accounting or procuring the execution of a valuable security
by deception under the 1968 Theft Act, and therefore, in law, the property in
the money transfer could not pass lawfully to the insurance company or product provider.

24.Despite this
institutionalised level of fraudulent practice, not onesalesman or product provider was everinterviewed as a suspect for a criminal
offence.Approximately 65,000 former
mineworkers alone transferred in the region of £736 million out of the
Mineworkers Pension Scheme (one of the
best and most generous in the country), on the advice of salesmen who told them
they could get a better deal outside their
own scheme, advice which was wholly untrue, and criminally deceptive. Nearly
27,000 teachers left the Teacher's Superannuation Scheme into which local
education authorities paid a contribution of 8.05% of salary and which
possessed index-linked benefits.

Effective regulation
of financial markets

25.Ever since my
early study visits to the USA in the early 1980s to study financial regulation with the SEC, the NASD,
the CFTC and the major Exchanges, I have long reiterated my belief in the
importance of the financial regulatory function in reining back the dishonest
excesses of the financial sector.

26.Now, with the
news about Standard Chartered Bank and their wholesale disregard of US laws on
sanctions, my belief is reinforced even more strongly. This episode is just yet
another example of what has become an endemic culture of legal anomie (norm
evasion) within the banking system, where the Executives of the major banks
have decided that they are 'too big to jail', and international laws do not
apply to them when they become inconvenient.

27.Without any doubt,
the scandal that has become the ‘banking collapse’in the UK, (not my words, they are Vince Cable’s on the
‘Today Programme’ on 26th July 2012), was caused by an excess of greed on
the part of the banks, influenced both by a new environment of derivative abuse
in the field of debt securitisation, but coupled with a culture of criminality
which has been allowed to become endemic in the financial sector; an admixture
of regulatory failure, influenced by political incompetence and the policy of a
‘light touch approach’ towards regulation of banks; and the total failure of
the regulators to understand and respond to the criminogenic culture inherent
within the new product models adopted by the practitioners whom they were
supposed to oversee.

28.Lest anyone be
tempted to observe that the financial problem started in the US, let me say
that it was only allowed to become as bad as it did because the Americans,
first under Reagan and later the younger George Bush had demolished a superb
regulatory edifice that had been in place since 1934, and had made a
significant contribution to America’s post war financial hegemony!

29.Those US pioneers
had taught us that without effective and professional regulators, armed with
personal courage, good legal knowledge and sincere moral integrity, the
financial sector it purports to regulate will run wild. The very reason that
the SEC was created in the first place was to restore the integrity of the
markets destroyed in the aftermath of the Wall
Street Crash, a financial scandal caused by an epidemic of criminal operators
who had undermined the credibility of the exchanges.

30.The financial
sector existed then, as it does today, to make money, lots of it, and it
doesn’t really care how it does it. Those who populate the financial markets
are fairly crude creatures, motivated by greed and selfishness. You don’t need
to be very bright or intellectual to make money in the financial sector, but
you do have to be willing to sacrifice any principles of honesty or integrity
you may once have been born with. As Balzac once said, ‘behind every great
fortune there is a great crime’!

31.So, why and how
has this state of affairs been allowed to develop?

32.The British have
always adopted a schizophrenic attitude towards the way they view criminal
activity. There is the crime of the streets, burglary, theft, mugging,
joy-riding, rioting, committed by identifiable criminal types, and dealt with
by the police. Then there is the kind of wrong-doing that takes place within
the financial sector, but when it happens, it gets called something else
(mis-selling), and is dealt with by regulatory agencies.

33.For some reason
there is a complete distinction between the two courses of conduct. They are,
and have always been dealt with differently; penalised differently;
administered differently, and for some strange reason which I only finally
understood after I had studied the work of Edwin Sutherland, considered
differently by politicians, regulators and in many cases, even by the general
public.

34.I once conducted
an academic research project where I asked a group of financial services
compliance officers to place in order of seriousness a series of criminal
offences. In the general list I included six typical identifiable criminal
offences such as theft, fraud, joy riding, robbery, while for the other six I
used recognisable terms such as ‘insider trading’, ‘churning’, ‘misselling a
financial product for the purposes of generating more commission, ‘misselling a
financial product which meant that the client was no better off, but which
generated more profit for the company’, ‘front running’, etc.

35.Without
exception, in excess of 60 respondents put the identifiable ordinary crimes
first in the list, while putting the financial issues last. It was as if
activities which could be described in conventional criminal terms assumed a
far greater degree of social opprobrium than did financial crimes, even though
in pure legal definitions, all the offences alleged were equally criminal and
all should be investigated and punished equally seriously.

36.It was a classic
illustration of what Professor Michael Levi of Cardiff University once referred
to as the huge social gulf that existed between the crimes of the streets as
opposed to the crimes in the suites!

37.There is
absolutely no reason why someone who steals a car or robs apost office should be considered to
be any different from a person who trades
in securities using inside information, who allows his institution to be used for the purposes of laundering of
criminal money, or who helps himself to funds deposited with him for the
purposes of investment.

38.One of the
greatest tragedies of the British regime of financial regulation, and one of
its biggest failings, is that none of those who hold down senior roles within
the upper reaches of the regulatory agencies, have ever once undertaken even
the simplest form of criminal investigation. They have never even arrested so
much as a shoplifter, and they do not know
how criminals will behave when they are being investigated; they do not know
what evidence is needed to bring these persons before a court and to obtain a
safe and proper conviction; they do not know how to go about acquiring even the most basic evidence which can be
used to convict a criminal; and perhaps most importantly of all, they do not understand
how to conduct themselves when they are being required to investigate a pattern
of behaviour which might prove to possess important criminal consequences. Put
more simply, they simply do not understand the signs of crime, and they are
therefore ill-equipped to deal with them even when they are staring them in the
face!

39.Yet these are the
very people we put in charge of our regulatory agencies,
and we give them very complex investigatory powers. Members of the ‘Great and
Good’, people who have held down no doubt important roles in academe or the
law, (even the Serious Fraud Office
has been seriously criticised for its administrative failings), banking or
other areas of financial business, former civil servants or senior partners in
leading firms of accountants (if ever there was a serious conflict of interests
it is in appointments such as these), or people who are seconded from other
regulatory environments, but who have no experience at all in dealing with
criminals.

40.While they all
possess undoubted skills and experience, the one thing they all have in common
is a complete lack of any understanding of the function of the criminal
temperament.

41.And the people
they recruit are cast in the same mould. They use the age-old civil service
tests of suitability, are they the ‘safe pair of hands’, or ‘is he one of us’,
requirements which succeed only in maintaining a regime of ineptitude. I simply
cannot recall how many former senior, experienced police detectives, men and
women who have real skill and experience in dealing with major criminals, have
ever been recruited to become senior figures in the regulatory agencies.

42.There may be some
who have found a niche in the business sector, albeit not too many, and at not
too elevated a rank, but I cannot think of a single former detective currently
holding down an important role in any financial regulatory agency.

43.It is as if the
skills required to catch common working class thieves are considered to be
unsuitable to catch criminals from a more elevated social sector of society.

44.I have observed
this phenomenon for so many years, and I have come to the single and
unpalatable conclusion that it has that it has to be driven by the class
element. Putting it more simply, it is as if society is happy to leave
detectives to deal with the criminal classes, but they don’t want ‘Mr Plod’
stumbling around among the more delicate sensibilities to be found in the
financial sector.

45.How else can you
explain the fact that when I was a detective, I could charge a man with an
offence which could result in his being incarcerated for life, without the need
for any approval from anyone in Government, whereas if I wanted to charge a
businessman with an offence subject to the Companies Act with a maximum period
of imprisonment of 2 years, I was required to seek the authority of the Secretary
of State for Trade and Industry first?

46.The civil service
and the civil administrative function simply refuse to acknowledge the skills
and the knowledge of police. It has been ever thus. During my career, even when
I could demonstrate that my squad was dealing with named US mafia organised
criminals who were setting up share dealing operations in London, DTI officials
refused to do anything about it, and just laughed at us, accusing us of ‘seeing
the mafia behind every bush’!

Monday, March 25, 2013

This is the first tranche of the evidence I submitted to the Parliamentary Commission onBanking, and which their Government Servants attempted to suppress. The other two tranches will be published in the following days.

Response to the Parliamentary Commission on Banking Standards

Professional standards and culture of the UK
banking sector

Rowan Bosworth-Davies M.A

The views and opinions expressed in this paper
are entirely those of the author and reflect no other agency, department or
company.

Summary

·
This paper makes the assertion that the British Banking Industry has become
identical with an Organised Criminal Enterprise.

·
It examines the nature of the criminogenic personality and determines the kind
of person who is more likely to break the criminal law and why.

·
It asserts that this state of affairs has been allowed to develop because of
the failure of the regulatory process to develop the necessary skills and
knowledge of the conduct of criminals to enable them to deal professionally
with the misdeeds of the banking sector and the reluctance of the regulators to
use their statutory powers effectively.

·
It defines why there needs to be a far greater degree of criminal prosecution
brought against financial practitioners and explains why such processes are
among the only penalties that such practitioners truly fear.

Definitions of
Organised Crime

"...Organised
crime is a structure that includes two or more people whose purpose is to
commit one or more serious crimes or offences for financial gain or material
benefit..." (Australia)

"...It is
serious crime planned and carried out by a group of at least three people to
benefit one or more members of the group...! (Canada)

"...Organised
crime constitutes any enterprise, or group of persons, engaged in continuing
illegal activities which has as its primary purpose the generation of profits,
irrespective of national boundaries... (UK)

1.
The British banking sector has become an organised criminal enterprise which
has been allowed to develop because of the criminogenic environment in which it
functions, which has resulted from the absence of any meaningful regulation
which those who control and manage the banks would fear.

2.
In this organised criminal category I include the various mis-selling cases,
including pensions, PPI Insurance and interest rate swap derivatives; the
criminal manipulation by Barclays and other banks of the LIBOR interest rate
structures; the institutionalised level of money laundering as identified in
the HSBC case; the serial abuse of the US sanctions provisions as indicated in
the Standard Chartered Bank case; as well as many other examples of criminal
actions such as theft of client funds, teeming and lading, abuse of client
instructions, insider dealing, front running, churning, and market manipulation
which have become the subject of international regulatory interventions.

3.
If the recent financial devastation in UK financial markets has taught us
anything, one qualifier stands out above all the rest of the explanations. The
effective ‘regulation’ of the market in financial services in the United
Kingdom, particularly in the areas of preventing and forestalling commercial
activity which has the capability to undermine the well-being of the financial
market, in which I include not only financial criminality and money laundering,
but also the pro-active identification and prevention of financial damage
has, to all intents and purposes, totally failed.

4.
It has failed despite the huge bureaucratic organisation which has been
created for its control, because those who are employed to provide the
regulatory oversight of the market, the Lead Regulator, the Financial Services
Authority, and the subordinate compliance officers within the individual
regulated member firms, do not and have never understood the true nature of the
criminogenic personality of so many of those who profess the trade of financial
practitioner, nor do they exhibit any great inclination to wish to deal with
the egregious activities of these individuals in a 'policing' manner.

The Anomie of Affluence and the Legitimation
of

Deviancy - Towards a theory of Criminogenisis.

5. Much of the trading activity which takes place within the banking environment,
particularly in the area of proprietory trading is literally no different from
gambling on horse races or games of chance and its practitioners tend, generally,
to possess the same commercial mentality as the gambler.

6. At the same time, both floor and desk market professionals tend to
be heavily influenced by a trading culture which preaches the virtues of adopting
a grossed-out, high profiled, risk-taking personality, which needs to be
constantly attested to..

7. Psychologically, many of these men and women can be defined as being
'regulatorily resistant'. Theirs is a primarily deviant, norm- evasive,
criminogenic culture, not much given to the willing acceptance of regulatory
control. Such an uncompromising statement should not be immediately interpreted
to mean that these practitioners are committing wholesale overt criminal acts.
It simply means that their risk- taking culture, itself the antithesis of the
traditional perception of the risk-reduction function of these markets; coupled
with the highly competitive environment within which they work, whose new
traditions give all the impression of flouting traditional, 'old market' norms;

Which predispose
them to break the rules more readily than practitioners in other commercial
sectors. These are the traders to whom the compliance officer is
generally seen as 'the business prevention officer' and the traders tend to
view each new regulatory notice as an irritating inconvenience standing
in the way of increasingly innovative trading.

Each new regulatory
requirement is looked upon as a challenge to the ingenuity of the traders, and
competitions are held by dealers to see who can get round the controls
undiscovered, and in the most profitable manner. In his article, 'Mavericks at
the Casino: Legal and Ethical Indeterminancy in the Financial Markets',
Christopher Stanley identified the development of this new phenomenon of
regulatory resistance within the previously ordered environment of the City of
London.

8. ' The New City reflected the ideological aspirations of a
system of political administrations which disrupted the post-war
consensus of relations between polity and economy. It also reflected the
Casino or Disorganisation of Capitalism: 'an international financial system in
which gamblers in the casino have got out of hand'. The New City was international,
technological and subscribed to the Enterprise Culture ethos which placed
individual success and self-reliance as the primary indicators of excellence. The structural
changes which the Government introduced, in terms of trading practice and
regulation, operated with the new financial products and markets to ensure that
the particular elite of the Old City, which was perceived as a dangerously
destabilising hegemonic counterforce as a result of the tension between Establishment
and Disestablishment, was dislodged in the face of externally imposed
change. Thus settled norms of conduct were open to disruption'.

9. Pursuing the 'Legitimation of Deviancy'
theory, Stanley drew upon the concepts of the 'Anomie of Affluence'
to attempt 'explanations in this formulation of individual conduct within this
particular field of moral and economic deregulation.' He posited a vision
of a market in which money no longer possessed any intrinsic value as a
benchmark of the underlying value of the commodity traded, but became a
'free-floating signifier detached from the real processes to which it
once referred...there is therefore a transition in its nature as a
commodity to which moral or ethical values can be attached. In addition
the artificiality of electronic money enabled the further disappearance of the
victim and the possibility of justification through reference to prevailing
economic rationality, ie 'Greed is Good'.

10.This specific
problem of ‘regulatory resistance’ has been endemic in the regulatory model of
the UK’s financial sector since the passing of the Financial
Services Act 1986. In this presentation, one of my areas of focus is to attempt
to expand and develop the concept of the ‘criminogenic’ nature of the state of
regulatory resistance, or ‘legitimised deviancy’ which so many financial
practitioners espouse. By ‘criminogenic’ I mean conduct or behavior which has
the potential to become criminal, or at least, so vitally damaging at
some stage in the process, that any attempts to deal with the problem
will almost inevitably lead to further potential criminal behaviour.

11.By examining the
behavior and conduct of persons within the financial sector, we can establish
traits which indicate a potential to be more or less willing to engage in
conduct or behavior which may result in the commission of criminogenic
activity. Alternatively, where, through ignorance of the underlying
criminogenic potential of new products or sales practices, those employed to
‘apply compliance procedures’ in the market ignore the likelihood of the new
risks being generated. In so doing, they allow the damaging conduct to
continue, and in examining this conduct, we can begin to determine where they
are exposing the market to far greater systemic risk than it either needs or
can cope with.

12.A derivatives trader
who habitually spends his evenings spending vast amounts of his firm’s
money entertaining clients in lap-dancing clubs, the kind of man who is willing
to pay the bill for confirmed criminal offences, ie hiring prostitutes
(supplying prostitution) and supplying recreational narcotics, is not the
kind of man who is going to spend too long worrying about the finer niceties of
the Insider Dealing rules or money laundering regulations.

13.‘As long as we
got results, as long as we got our commission and good feedback from the
clients, they (the employing bank) didn’t really give a shit…I think the
banks know the situation, and so they don’t do the random drug tests,
because they know half their staff would be on it, and they
know that in a high-pressure job, they have to allow their traders to have
these excesses. They don’t care about the health of their workforce
as long as they’re making money…’ (Seth Freedman)

14.‘ …prompted by
the beckoning finger from the clearly coked-up Asian chick nearest the
open door, I nervously walked towards the car. I clumsily shuffled into my seat
and saw in the gloom my three colleagues all sitting with their respective new
lady-friends. They were all snorting yet more lines of cocaine that our
ever-so-thoughtful hosts had prepared for us on little mirrors…’ (Geraint
Anderson)

15.The basis of the
underlying theory is a concept which is well-known to any experienced
street detective who is trained to deal with crime and to recognize the signs
of the criminogenic personality, and briefly put, states that those
who act or behave in an anomic fashion in their ordinary, every-day existence,
who bend or break minor rules or simple laws for their own self-gratification,
or who refuse to conform to ordinary norms of human conduct at times when their
surrounding conditions would require
such behaviour, will have a greater propensity to act in a similar, anomic
way in many other circumstances, and where a situation arises which gives
them a series of choices, they will inevitably take the line of least
resistance.

16.James Q Wilson
has alluded to this kind of ‘behavioural arbitrage’ when defining his
“broken windows” theory of criminal conduct. Those who are
prepared to commit minor acts of criminal activity as a matter of course, have
little difficulty in committing more serious acts of criminality when occasion
demands. The pro-active policing policy therefore is not to ignore
but to focus attention on the immediate minor offences, because in many cases,
they will lead on to evidence of more and greater criminality.

About Me

Having spent my career dealing with financial crime, both as a Met detective and as a legal consultant, I now spend my time working with financial institutions advising them on the best way to provide compliance with the plethora of conflicting regulations and laws designed to prevent and forestall money laundering - whatever that might be! This blog aims to provide a venue for discussion on these and aligned issues, because most of these subjects are so surrounded by disinformation and downright intellectual dishonesty, an alternative mouthpiece is predicated. Please share your views with what is published here from time to time!